JUDGMENT - Chagla, C.J. 1. A very interesting and by no means easy question arises in this reference with regard to the interpretation of Section 12B of the Income-tax Act. The assessee company is a private limited company and at the material time, which is the assessment year 1947-48, the company was the managing agents of Madhowji Dharamsi Manufacturing Co. Ltd. and also of Sir Shapurji Broacha Mills Ltd. The assessee company held the bulk of the conversion shares of the Sir Shapurji Broacha Mills and particularly all the conversion shares of the Madhowji Dharamsi Mills. It is mentioned in the statement of the case that these shares were held by the assessee company, but we have been told-and that appears to be the fact-that really these shares were held by the Gwalior Durbar, but were controlled by the assessee company. On the 14th September, 1946, Dalmia Investment Co. Ltd., wrote a letter to the assessee company making a certain offer and the offer was that they agreed to purchase all the conversion shares of Sir Shapurji Broacha Mills at Rs. 300 together with the managing agency of the mills. The letter further stated that on the assessee company accepting the offer the Dalmia Co. would pay the assessee company will have to arrange to get the transfer of the managing agency sanctioned by the general body of the shareholders within the period of 40 days from the date of acceptance; and the letter went on to state :"As soon as the transfer is sanctioned, we will pay the balance of the purchase price." The letter also stated that at the time of the transfer the assessee company will arrange that all the existing directors will resign from the board. On the same day a similar offer was made with regard to the shares of the Madhowji Dharamsi Co. and the only difference in the offer was that Rs. 500 per share was offered in place of Rs. 300 per share offered for the shares of Sir Shapurji Broacha Mills Ltd. On the 26th September, 1946, a meeting was held of the board of directors of the assessee company and the board, in so far as the offer of Dalmia Co. 500 per share was offered in place of Rs. 300 per share offered for the shares of Sir Shapurji Broacha Mills Ltd. On the 26th September, 1946, a meeting was held of the board of directors of the assessee company and the board, in so far as the offer of Dalmia Co. were placed before before the board and the board, in so far as the offer related to the shares belonging to the Durbar, resolved that the offer of Dalmia Investment Co. Ltd., as set out in these two letters should be accepted. It was further resolved that out of the total amount received from the sale of the shares a sum of Rs. 1 core should be paid to the Provident Investment Co. Ltd., i. e., the assessee company, as compensation for the loss of the managing agency of the two mills. On the 30th September, 1946, the assessee company communicated to the Dalmia Co., their acceptance of the offer made by the Dalmia Co. On the 7th October, 1946, a letter was received by the assessee company from Dalmia Co., and the letter recorded an agreement arrived at which modified the original agreement and the modification was to the following effect : "In our letters of offer which have been accepted by you, it was arranged that the managing agency will be transferred either to us or to our nominees. Now instead of doing so by you as the present managing agents will be give their resignation, so that at the time of delivery of the shares and payment of moneys, your managing agency will have come to an end. In view of the above, it is not necessary to obtain any sanction of general meeting." Thereafter the assessee company tendered its resignation as a managing agents, the resignation was accepted, and the assessee company ceased to function as the managing agents. On these facts the question that arises is whether the sum of Rs. 1 core which was paid by Dalmia Co., as part of the consideration for the purchase of the shares of Sir Shapurji Broacha Mills and the Madhowji Dharamsi Mills and which was paid to the assessee company as compensation for the loss of the managing agency of the two mills, result in a capital gain liable to tax under Section 12B of the Income-tax Act. The taxing authorities computed the capital gain Rs. 18,81,900 and the Tribunal has upheld the assessment made by the taxing authorities. 2. Turning to Section 12B, it provides that the tax shall be payable by an assessee under the head "Capital gains" in respect of any profits or gains arising from the sales, exchange or transfer of a capital asset effected after the 31st March, 1946, and before the 1st April, 1948. Therefore it is not in respect of very capital gain that the tax can be levied. The capital gain must be in respect of profits or gains arising from the sale, exchange or transfer of a capital asset. In this case there is no dispute that the managing agency which the assessee company had was a capital asset, not is there any dispute that the sum of Rs. 1 core which the assessee company received was a capital gain, but the controversy centres around the question as to whether this capital gain was in respect of the sale or transfer of the managing agency. No question arises with regards to exchange in this case. But whereas the taxing authorities contend that the managing agency was sold or transferred and by result of the sale or transfer the assessee received capital gains, the contention of the assessee company is that there was neither a sale or transfer and the capital gain arose out of a transaction which does not fall with in the ambit of Section 12B. In construing Section 12B we must not give to the expression "sale or transfer" its technical meaning, nor must we attribute to "sale or transfer" as used by the legal formalities. But even giving to the expression its plain ordinary meaning, we must have before us a transaction is embodied we must be in a position to say that the transaction between the assessee company and the Dalmia Co., was a transaction of sale or transfer. 3. Now, as we shall presently point out, the authorities make it clear that it is not competent to the court to look to the substance of the matter independently of the real transaction arrived at between the parties. 3. Now, as we shall presently point out, the authorities make it clear that it is not competent to the court to look to the substance of the matter independently of the real transaction arrived at between the parties. If a transaction creates certain legal rights and obligations, then court must give effects to those legal rights and obligations and must not, overlooking these rights and obligations, try and fathom what was in substance the nature of the transaction entered into by the parties. The Court is not confined merely to looking to the form of the transaction. It is open to the court to ignore the form and ascertain the real nature of the transaction. But while it is open to the Court to ignore the form, it is not open to the Court to overlook or to ignore the true legal position that arise out of a document or documents in which the parties have chosen to embody the transactions. The Court may even look at the surrounding circumstances in construing a documents, but the Court in looking at the surrounding circumstances must be anxious all the time to determine what is the true nature of the transaction. It has also been stated that the same result may be achieved by two entirely different transactions and it may be that where as one transaction could be subjected him to taxation rather than a transaction which permitted him to escape taxation. A citizen is perfectly entitled to exercise his ingenuity so to arrange his affairs as may make it possible for him legally and lawfully not to pay tax, and if his ingenuity succeeds, however reluctant the court may be to acknowledge the cleverness of the assessee, the Court must give effect to the letter of the taxation law rather than strain that letter against the assessee. 4. Now, these principles have been enunciated and have now been accepted as well settled canons of interpretation and of determination of the nature of a transaction when the question arises whether a particular transaction is subject to tax or not. The first case to which reference might be made is a decision of the Privy Council in Bank of Chettinad Ltd., v. Commissioner of Income-tax, Madras ([1940] 8 ITR 522 at p. 526). The first case to which reference might be made is a decision of the Privy Council in Bank of Chettinad Ltd., v. Commissioner of Income-tax, Madras ([1940] 8 ITR 522 at p. 526). Their Lordships of the Privy Council say : "Their Lordships think it necessary once more to protest against the suggestion that in revenue cases the strict legal position." Therefore if the strict legal position is clear, the Court is not permitted to look at the substances of the matter and ignore the true legal position. The Privy Council is enunciating this principle relied on the leading case of Duke of Westminster v. Commissioners of Inland Revenue ([1936] 19 tax cas. 490, and Lord Tomlin at p. 520) makes the following observation in a case by executing a number of deeds agreed to makes the following observations in a case the facts of which the assessee had agreed to pay constituted salary or wages or were annual payments which were deductible for the purpose of income-tax, and the question mainly turned on the construction of this deed, and Lord Tomlin at page 520 states : "Apart, however, from the question of contract with which I have dealt it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regards what is called the substance of the matter." And he goes on to say : "This supposed doctrine... seems to rest for it support upon a misunderstanding of language used in some earlier cases. seems to rest for it support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled and the supposed doctrine seems to involve substituting the uncertain and crooked cord of discretion for the golden and straight mete wand of the law." He further goes on to say : "Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be." And he scathingly condemns this doctrine of the substance in the following words : "This so-called doctrine of the substance seems to me to be nothing more than an attempt to make a man pay not with standing that he has so ordered his affairs that the amount of tax sought from him is not legally claimable." The learned Law Lord then refers to the case of Helby v. Matthews ([1895] A. C. 471) and he says that the principle emerging from that case was that the substance of Secretary of State in Council of Indian v. Scoble [1903] A. C. 299 and he says that the indisputable rule that is deducible from that decision is that the surrounding circumstances must be regarded in construing a document. He also quotes the remarks of Lord Justice Warrington in In re Hinckes, Dashwood v. Hinckes ([1921] 1 Ch. 475) : "It is said we must go behind the form and look at the substance. I do look at the legal effect of the bargain which the parties have entered into." And he winds up by saying that "here the substance is that which results from legal rights and obligations of the parties ascertained upon ordinary legal principles." 5. Then there is the judgment of the House of Lords in Inland Revenue Commissioners v. Wesleyan General Assurance Society ([1948] 16 ITR) and there also the facts were very striking. Then there is the judgment of the House of Lords in Inland Revenue Commissioners v. Wesleyan General Assurance Society ([1948] 16 ITR) and there also the facts were very striking. An insurances company by a policy agreed to pay on the death of the person insured a certain sum measured by an amount fixed for each month, and the policy provided that the assured can obtain as a loans or were loans or were really in the nature of annuities, and the House of Lords held that the payments were loans, and Lord Simon at page 103 deals with two propositions which he says are well-established in the application of the law relating to income-tax. The first proposition is that the name given to transaction by the parties concerned does not necessarily decide the nature of the transaction, and the second proposition is that the transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax, and in support of the second proposition he cites with approval the statement of the Master of the Rolls that "in dealing with income-tax questions, it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable." 6. Now applying these principles to the facts before us, what we have to consider is the true nature of the transaction effected between the assessee company and the Dalmia Co. There is no doubt that under the original contract the assessee company was to have received a sum of Rs. 1 crore for transferring or selling the managing agency of the two companies to the Dalmia Co. If that transaction had gone through there could not have been the slightest doubt that the assessee company would have been liable to tax. But the difficulty arises because there was a modification brought about on the 7th of October, 1946, and the real question that arises for our determination is, what was the effect of that modification? The nature and effect of the modification is clear. The Dalmia Co. did not want the assessee company to transfer their managing agency to the Dalmia Co. The nature and effect of the modification is clear. The Dalmia Co. did not want the assessee company to transfer their managing agency to the Dalmia Co. Instead of that the Dalmia Co. wanted the assessee company to resign as managing agents. Sir Nusserwanjis contention is that all that the letter of the 7th October, 1946, did was to change or alter the mode of performance. He says that essentially the original contract remained unaltered. But the Dalmia Co., instead of getting the contract performed in a particular manner, wanted it to be performed in another manner, and, therefore, says Sir Nusserwanji, it makes no difference to the liability of the assessee company to pay tax on the capital gain. Sir Nusserwanji says that there was a concluded contract under which the assessee company was to cease to be the managing agents of these two companies and the Dalmia Co. was to become the managing agents, and in substance the effect of the modification was the same. The assessee company was to cease to be the managing agents and as far as the Dalmia Co. was concerned it had the option or choice whether to accept a transfer or to accept a resignation of the managing agents. It is further contended on behalf of the Commissioner that this is a matter between the assessee company and the Revenue Department, and the Dalmia Co. by exercise of its option or choice cannot determine the taxability of any part of the sum of Rs. 1 crore paid to the assessee company for the managing agency. It is further pointed out that as far as the assessee company was concerned, at all times it was ready and willing to transfer or assign the managing agency to the Dalmia Co., but the Dalmia Co. preferred a different mode of performance and therefore asked for resignation rather than transfer. But Sir Nusserwanji says that that does not alter the nature of the transaction which was the sale of the managing agency and nothing else. He points out that the resolution of the board of directors makes it clear that the assessee company was to receive Rs. 1 crore as compensation for the loss of the managing agency of the two mills. He points out that the resolution of the board of directors makes it clear that the assessee company was to receive Rs. 1 crore as compensation for the loss of the managing agency of the two mills. That was the identical consideration which they ultimately received and that resulted in a capital gain arising out of the sale by the assessee company of its managing agency. 7. Now, put that way, it is difficult to resist the argument. But the matter is not as simple as that. We are inclined to agree with Sir Nusserwanji that if the letter of the 7th of October, 1946, constituted a mere alteration in the mode of performance and the contract of sale or transfer originally arrived at remained unaffected, then the assessee could be liable to tax because the consideration was received by him out of a transaction of sale. If a sale takes place it is open to the vendee to tell the vendor that he would want the sale to be effected in a particular manner or that he should deal with or do with the object or article sold whatever the vendee desired him to do. The exercise of the right by the vendee to determine the mode of performance or to alter the mode of performance would not and could not change the essential nature of the transaction. But in our opinion the letter of the 7th October, 1946, does not merely alter the mode of performance, but it substitutes an entirely different contract for the original contract entered into and the transaction that would have been effected by reason of the original contract is an entirely different transaction from the one which was ultimately effected by reason of the modified contract arrived at on the 7th October, 1946. Whereas under the original contract the Dalmia Co., wanted the managing agency to be transferred, which means that it wanted the benefit of that contract to be vested in it, and also it was prepared to accept the burden of the obligations that went with that contract, under the substituted contract it did not want the managing agency to be assigned to it at all. On the contrary it wanted the assessee company to relinquish their rights in the managing agency of the two mills by resigning. On the contrary it wanted the assessee company to relinquish their rights in the managing agency of the two mills by resigning. It is not necessary to point out the well-settled difference between a transfer or a sale and a relinquishment. A sale or a transfer presupposes the existence of the property which is sold or transferred. It presupposes the transfer from one person to another of the right in property. On the other hand, relinquishment means the extinction of a right or the destruction of a property and if the property is destroyed or the right is extinguished there is nothing left to transfer or to sell. Under the first contract the managing agency, which is the capital asset with which we are concerned, would have continued to subsist and would have been vested in Dalmia Co. It could only have been vested by a deed of assignment executed by the assessee company and by getting the consent of the shareholders, and these were the two conditions which the Dalmia Co., had insisted upon in their first letter. Under the substituted contract the managing agency which had been vested in the assessee company would cease to exist and no question would arise of that managing agency being transferred to or being vested in the Dalmia Co. 8. It has been suggested by Sir Nusserwanji that Dalmia chose to get the benefit of the managing agency by a different method. It was open to him to get himself appointed by the two companies as he held the bulk of the shares, or perhaps he preferred to control the two companies without the intervention of any managing agents. But this argument ignores the very important and basic fact that what we are concerned with is not any other benefit which the assessee company had under the managing agency agreement with the two companies. The original contract was with regard to the benefits and the Dalmia Co. was prepared to pay Rs. 1 core because it wanted those benefits. But when the transaction ultimately went through and the assessee company resigned, those benefits had been extinguished or destroyed and they never vested in the Dalmia Co. If the two companies had appointed and a fresh agreement would have to be entered into between the companies and the Dalmia Co. That managing agency which vested in the assessee company. But when the transaction ultimately went through and the assessee company resigned, those benefits had been extinguished or destroyed and they never vested in the Dalmia Co. If the two companies had appointed and a fresh agreement would have to be entered into between the companies and the Dalmia Co. That managing agency which vested in the assessee company. Therefore it is clear that as a result of the transaction by which the assessee company obtained Rs. 1 core the assessee company ceased to be the managing agents of the two companies; but no one else obtained the benefits of those two agreements. In other words, the property which was vested in the assessee company in the shape of the managing agency was destroyed and ceased to exist. That property was never transferred in favour of any one else, nor did it ever vest in any one else. Even if Sir Nusserwanji was right that the Dalmia Co. brought about the same result by a different transaction, it was open to the parties to select one transaction which avoided tax rather than a transaction which attracted tax. But if the two transactions were in essence different, if they created different legal rights and obligations, it is not open to the taxing authorities to say, "Treat one transaction as if it was the same as the other transaction." As we have just pointed out on the authorities, what we have to consider whether the transaction which would have resulted if the first contract have not been modified, and the transaction was ultimately carried out by result of the modification, are the same or they are different, different in the sense that they give rise to different legal position and different legal rights and obligations. In our opinion it seems to be fairly clear that this two transaction are not identical. In the one case the result would be the sale or the transfer of property in favour of Dalmia Co.; in the other case there is no sale or transfer there is only the relinquishment of rights by the assessee company or destruction of property by the company at the instances of Dalima Co. 9. In the one case the result would be the sale or the transfer of property in favour of Dalmia Co.; in the other case there is no sale or transfer there is only the relinquishment of rights by the assessee company or destruction of property by the company at the instances of Dalima Co. 9. Now, the result of our decision may be unfortunate, but it is clear, and Sir Nusserwanji does not contest the position, that Section 12B does not subject to the capital gains arising to an assessee by reason of the fact that he has relinquished some property belonging to him or some rights vested in him. It may be a lacuna, but the Legislature, for reason best known to it, has not chosen to tax such a transaction, and Sir Nusserwanji also concedes that if we take the view that Rs. 1 crore which the assessee company received was received by it for resigning the managing agency and not for selling the managing agency, and if resignation means relinguishment of the assessee companys rights as managing agents, then the assessee company would not be liable to tax. Shorn of extraneous and irrelevant matters, the position really narrows itself down to this. Originally, the assessee company agreed to sell or transfer its managing agency to Dalima Co. for a consideration of Rs. 1 crore. That agreement was altered and for the same consideration the assessee company agreed to relinquish its rights in the managing agency commission by resigning as managing agents. The consideration remained the same, the result as a far as the assessee company was concerned was the same, but the legal position that emerged was entirely different from the legal position that would have arisen if the first contract had stood. We are unable to accept the view taken by the Tribunal that the assessee company transferred the managing agency to the managed companies and that therefore there was a transfer which resulted in capital gains to the assessee company. It is difficult to understand how by resigning the managing agency the assessee company transferred the agency of the two companies. Sir Nusserwanji himself has not attempted to support this view which has been given expression to by the Tribunal in its order. 10. In our opinion, therefore, the answer which we must give to the question submitted to us is in the negative. Sir Nusserwanji himself has not attempted to support this view which has been given expression to by the Tribunal in its order. 10. In our opinion, therefore, the answer which we must give to the question submitted to us is in the negative. The Commissioner must pay the costs. 11. Reference answered in the negative.